China: CPI inflation rebounds on lunar new year effect – Nomura

China’s consumer price index (CPI) inflation rose to 2.9% y-o-y in February after declining to 1.5% in January, stronger than market expectations (Consensus: 2.5%; Nomura: 2.6%), notes the research team at Nomura.

Key Quotes

“Producer price index (PPI) inflation eased further to 3.7% y-o-y in February from 4.3% in January, slightly weaker than our forecast (Consensus and Nomura: 3.8%). In month-onmonth terms, PPI inflation declined to -0.1% from 0.3% in January.”

“The strong rise in CPI year-on-year change is mainly due to a base effect caused by calendar effects (the lunar new year holidays falling in late January last year but midFebruary this year), which significantly pushed up food price inflation to 4.4% y-o-y in February from -0.5% in January. Non-food price inflation rebounded to 2.5% y-o-y in February from 2.0% in January. Excluding food and energy prices, core CPI inflation rebounded to 2.5% y-o-y in February from 1.9% in January. On a month-on-month basis, CPI inflation picked up to 1.2% in February from 0.6% in January, driven by higher food prices due mainly to the seasonal factor of the lunar new year.”

“The moderation in PPI inflation was again caused by upstream sectors. PPI inflation in the raw materials sector dropped by 1.4 percentage points (pp) to 5.9% y-o-y in February, while that of the processing & assembly and mining sectors also moderated, albeit at a mild pace by 0.7pp and 0.4pp, respectively. By industry, PPI inflation fell visibly in ferrous metal processing, non-ferrous metal processing, chemical material & product, petroleum & coal processing, and non-metallic mineral product industries – similar to January. These five industries were responsible for a 0.6pp subtraction from the year-on-year headline number.”

“In contrast with solid trade growth in January-February, the continued moderation in PPI inflation signals weakness in growth momentum. We believe domestic demand will be weighed on by a cooling property market, tighter financial conditions, and continued reforms that may well cause some short-term pain to the real economy.”

“Looking ahead, we maintain our call for a drop of PPI inflation in 2018, due to the outlook of weakening investment demand and given that the financial cycle has already peaked, although there could be a temporary rebound in PPI inflation in Q2 due to a low base last year. We continue to expect a mild rise in CPI inflation through 2018, likely driven by higher food and services prices, and the pass-through of high producer and property prices. On the policy front, we expect the People’s Bank of China (PBoC) to maintain its neutral monetary policy stance. After the targeted reserve requirement ratio (RRR) cut that became effective in January, we believe the PBoC may find it necessary to cut the RRR again this year, to keep liquidity conditions stable. We maintain our call for a 50bp RRR cut in H2 2018.”